Lockyer: School bond election deals appear illegal

March 18, 2013

Updated Aug. 21, 2013 1:17 p.m.

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Borrowing through capital appreciation bonds is helping to pay for a 600-seat performing arts center at El Dorado High in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008. JEBB HARRIS, ORANGE COUNTY REGISTER

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State Treasurer Bill Lockyer has asked the attorney general to investigate whether school boards broke the law by signing up bond firms who provided political consulting for school bond elections. RICH PEDRONCELLI, AP

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Superintendent Doug Domene, left, and Director of Facilities and Maintenance Rick Guaderrama stand at the site of the new performing arts center at El Dorado High School in Placentia. The music hall will be built with the help of controversial capital-appreciation bonds, which delay payments for three decades. CORINNE GRIFFITHS, FOR THE REGISTER

Borrowing through capital appreciation bonds is helping to pay for a 600-seat performing arts center at El Dorado High in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008. JEBB HARRIS, ORANGE COUNTY REGISTER

State Treasurer Bill Lockyer asked the California attorney general Monday to investigate whether school officials were breaking the law by hiring banks and their political strategists to promote bond measures before voters.

Lockyer did not name the schools or banks involved in these deals. But some of the examples he describes in a letter to Attorney General Kamala Harris are the same as the Register found in place at Placentia-Yorba Linda Unified in a recent investigation.

His letter focuses on agreements where school districts give banks exclusive contracts to sell bonds approved by voters in return for the firms providing pre-election campaign services.

Placentia-Yorba Linda hired a bank named George K. Baum & Co. before a bond election in 2008. Voters agreed in the election that the district could issue $200 million in bonds to continue an ambitious building spree. School officials denied they had hired the bank for political work on the bond campaign, but public documents and interviews showed that the firm's strategists were extensively involved in getting the measure passed.

Under state law, it is illegal for school officials to use public money to hire political consultants to pass bond measures. But school districts across California continue to have political strategists who are being paid by their banks or outside financial advisors manage their bond election campaigns.

Lockyer said in an interview Monday that he believes these practices are illegal. If the attorney general agrees, he said, and issues a formal legal opinion, it could then be used by state or local prosecutors to challenge the deals.

"I was startled by how explicit the quid pro quos have become," Lockyer said.

Neither officials from Placentia-Yorba Linda or George K. Baum, which is headquartered in Kansas City, responded to calls for comment on Monday.

Carol Downey, president of the Placentia-Yorba Linda board, said previously that no public funds were used to pay the bank for the political campaign and that the firm's above-average fee for underwriting services was similar to what other California schools paid.

Baum executives have said they had followed "the letter and spirit of the many federal and state laws and regulations that govern our business."

In recent years, Baum executives have traveled to dozens of California school districts offering similar deals. According to documents, the bank has offered the schools help from its staff of political strategists and pollsters in putting a bond measure on the ballot and getting it passed. It has promised the schools that they will owe it nothing if the bond measure fails.

But if the measure succeeds, the schools must pay Baum fees to underwrite all the bonds authorized by voters. Placentia-Yorba Linda paid the bank 1.1 percent of the principal amount of the voter-approved bonds – or about $2 million. That fee is almost twice the national average that schools have paid for similar underwriting work.

George K. Baum's agreements with Placentia-Yorba Linda and other districts also gave the bank wide latitude in designing the debt and including terms that favored its investor clients who wanted to buy school bonds. Some of those bonds have included terms so detrimental to the school districts that they will haunt taxpayers for decades.

For example, just one $22 million borrowing by Placentia-Yorba-Linda in 2011 will cost taxpayers nearly 13 times that amount -- $280 million – to pay back. That loan consists of capital appreciation bonds, which are like a loan where no payments are made for as long as 40 years. That means that interest is charged on unpaid interest, greatly increasing the cost for future taxpayers.

Those who have criticized similar election practices by banks and school districts in the past praised Lockyer for requesting a formal legal opinion.

"There are several underwriting firms that have cornered the market in California through these pay-to-play practices," said Jordan Kaufman, assistant treasurer in Kern County, and chair of the school finance committee at the California Association of County Treasurers and Tax Collectors. "This is absolutely an important step."

The treasurers' association has tried to stop these deals by sponsoring several bills to close loopholes in state law. The legislation was defeated, however, after lobbying from school districts and in some cases the California Public Securities Association, whose members include George K. Baum, as well as two dozen other banks, financial advisors and law firms specializing in government bonds.

Robert Doty, a lawyer and municipal market consultant in Sacramento, said Lockyer's letter may pressure school officials to stop agreeing to deals that include political services. Doty pointed out that the legal risks are far greater for school officials than bank executives. It is not illegal for banks to provide political consulting. Instead, state law bans school officials from hiring political consultants.

Doty said that the written contracts between the schools and banks often don't specifically include political services. "Instead, it is done on the basis of understandings," he said. "The professional firms advertise on their websites their willingness to make contributions to bond elections, or in the case of financial advisors, to run the election campaigns."

In his letter, Lockyer also asked Harris whether a bank providing political services to a bond campaign must report the value of that work as a donation on election disclosure reports. In a review of Baum's work on elections held by three school districts, the Register found that the executives did not report the value of their political services as a contribution.

Robert Dalton, vice chairman of Baum, told The Register last month that the firm had relied on a law firm with expertise in election law to file its disclosure forms.

Lockyer is supporting a bill to limit how much debt schools can shift to future taxpayers through capital appreciation bonds. Fourteen school districts in Orange County have issued these bonds since 2007, with some delaying payments for as long as 40 years.

The bill would limit the bonds' maturity to 25 years and require that districts be able to renegotiate the terms. Most of the capital appreciation bonds recently issued by California schools are not callable, which means the districts can't ever buy them back to get a better deal.

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